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Australia –transfer pricing reforms international transaction documentation - time for a refresh?

In July 2013, new Australian transfer pricing rules came into effect. One of the features of the rules was that cross-border transactions are to be undertaken on an arms-length basis. The Australian Taxation Office (ATO) may disregard actual transactions and “reconstruct” them on a hypothetical arm’s length basis. The rules not only apply to entities within the same group, but can apply to transactions between unrelated parties if they have not dealt with each other on an arm’s length basis.

Under the rules which took effect in July 2013, tax payers must “self assess”. Businesses which do not have documentation in place substantiating the “arms-length” nature of their international transactions, run the risk of substantial penalties if the ATO subsequently adjusts those transactions. Australian subsidiaries may not be able to rely on documentation prepared for the whole group. Consequently, Australian entities should review all of their documentation relating to international transactions to ensure that it reflects market practice.

The Australian transfer pricing rules specifically adopt OECD guidance. On 1 December 2013 Australia assumed the presidency of the G20. The Prime Minister, Tony Abbott, announced that Australia would “lead stronger cooperation in the G20 to combat tax base erosion and profit shifting” (BEPS). On 30 January 2014, the OECD issued a draft report on transfer pricing documentation to assist cooperation between countries to combat BEPS.

If Australia adopts the OECD draft report, it’s likely that disclosure requirements and compliance costs will increase. Consequently it’s prudent to ensure all documentation complies with the current rules.